Following is the transcript of an exclusive CNBC interview with James Gorman, Chairman and CEO of Morgan Stanley at the Morgan Stanley Asia Pacific Summit in Singapore. The interview was broadcast on CNBC on 16 November 2017.
All references must be sourced to a "CNBC Interview'.
Interviewed by Sri Jegarajah, Senior Correspondent, CNBC.
Sri Jegarajah (SJ): Let's get straight into it, James P. Gorman is with us, the chairman and CEO of Morgan Stanley. James, thank you so much indeed for spending the time with us today. Let me start off by asking you about the outlook for the U.S. economy in 2018. How realistic is it to expect three percent sustained growth?
James Gorman: I think it's frankly probable at this point. I mean absent some sort of external shock, the economy is in good shape. Unemployment is trending. Unemployment is trending to four percent. This is extraordinary. Low inflation, corporate earnings are strong. The economy is doing well. So right now, I think most forecasters would expect a three percent type growth rate.
SJ: What about the Trump tax plan though? How confident are you that it will get passed and what do you think the impact will be on the markets and the broader economy?
James Gorman: Well I think, Sri, the administration knows that if they don't get this tax plan done, 2017 was a wasted opportunity. There's a Republican Congress, a Republican administration. This was a core plank of the administration's platform. So I think a plan should get done, but it's not certain. The question is how complex do you want to make this. Do you really want to redo all of the elements from estate tax to state tax deductibility to charitable giving so on? Do you really want to do that or do you want to stick with a simple corporate tax plan change with a few add-ons to it and then move forward and maybe make further adjustments and in coming years. So that's the tension complexity versus simplicity.
SJ: And the market seems to be laser focused on the corporate tax rate bringing it down to 20 percent. Is that achievable? Is that possible given the very divided, politically divided Congress?
James Gorman: Well, put aside partisan politics and just look at what's appropriate. Corporate taxes in the U.S. of 35 percent and the U.K. I think 20 percent. Most of the major jurisdictions around the world, they're somewhere between 15 and 25 percent, probably averaging closer to 20 percent. So for the U.S. to be so much off market it's going to lead to corporations doing things you would not normally do in terms of shifting revenues offshore, the kinds of inversions we saw a few years ago et cetera. So the U.S. has to bring the corporate tax plan down. They have to bring the rate down whether 20 percent is double certainly, I mean my target from early on was 25 percent and five to 10 cents on the dollar for money which is parked offshore. Bring that back and throw that into an infrastructure fund. The president obviously was much more ambitious, started 15 percent that's been dubbed back to 20 query whether that math can work and query whether it's necessary. But right now anywhere in the 20s, would be a very positive thing and would be stimulating for the economy.
SJ: Is there a risk that inflation could overheat though?
James Gorman: No I don't think so. I mean we've seen, frankly, deflation around the world for several years, and we're still seeing incredibly low rates of inflation. The worry has been that it hasn't heated up enough. At some point it kicks, you can't have unemployment approaching four percent and not have wage pressure. So at some point wage pressure kicks in.
SJ: When do you think that tipping point will arise?
James Gorman: You know I've been wrong on this, just to put it out there. I thought it would have arrived by now. But it's just hard to see with the job growth we're getting that doesn't kick in 2018.
SJ: Another big cornerstone off the Trump economic plan is deregulation. How much progress do you think is being made on that score?
James Gorman: Some, some, I mean it's people and policy. Right. So you start with who heats up the major regulatory agencies and just talking about the financial sector, the head of the FCC is change. The FDIC is changing. The OCC is changing. Bill Dudley, the New York Fed just announced he's stepping down next year. And obviously, there's been enormous changes at the Federal Reserve Board and Dan Tarullo moved on. Randy Quarles came in to take that position. So the impetus of change of this number of leaders change at any particular point in time, most of whom embrace the point of view that we are at the outer extremes of where regulation is starting to damage economic progress. Most of them embrace that. And so I think change will happen but we're not going to see a complete redo of Dodd-Frank nor should we. We're not going to see Glass-Steagall be brought back in nor should we. We're going to see some sensible, pragmatic, common sense changes to eight years of regulation. And it's now time to take a fresh look at that. And so I think things will happen but it won't happen in a dramatic way but it will definitely happen. We've hit the peak of bank regulation.
SJ: And a Powell-lead fed. What sort of tone do you think he will strike on deregulation?
James Gorman: Well firstly he's a terrific guy. He's been on the Fed board for a number of years and he's been part and parcel of the Fed leadership for that period of time. So I doubt you're going to see a dramatic shift. But Randy Quarles coming in to run a bank supervision, I think is a very positive step. He and Governor Powell are both very pragmatic people. And listen, I could go on all day long about where it's good, except Morgan Stanley submits 45,000 pages annually for our CCAR test. Let's not lose sight of where the big issues are. Let's focus the main systemically important institutions on the things that really matter. So I think it's what I call dial turning the dial got turned up too high. Let's dial them back a little bit without denigrating the capital integrity of the U.S. financial system.
SJ: Is Mohamed El-Erian the right man for vice-chair?
James Gorman: I don't know, he's certainly a very credible candidate. I mean look at his resume, he's extraordinarily knowledgeable, educated, world class. So he's a legitimate candidate. It's up to the governors and the government to figure out who the right people are.
SJ: Back to the markets, are the markets mispricing the Fed and mispricing the risk of the Fed? Adopting a more hawkish tone moving more aggressively or moving more faster in 2018.
James Gorman: I don't think so. I mean just start with the December meeting. The markets are pricing in I think 80, 85 percent chance I think, I think basically that saying it's a done deal. I think it is a done deal. Could something surprise us that the last jobs report between now and then? It's possible, but we'll get a rate increase. Listen, we need to start from… The question is, where are you starting from? If we were standing from moderate to high rates then you'd have a different set of questions. But we're starting from very low historically low rates and we've had those now for nearly 10 years. So getting to a normal situation is positive for the market because it gives the Federal Reserve monetary tools to work with. God forbid we enter into the next financial crisis.
SJ: With the risk of monetary policy miscalculation by the Fed or the ECB or moving too fast or hitting all the mobilization brakes too fast and that are pending the markets is that a real risk?
James Gorman: It's a risk to... I think it's a compelling risk at this point or probable risk. No I don't. I think the Fed and the ECB have signalled extraordinarily well. Listen when the market has a view on what is going to happen at the next FOMC meeting which is different from what ultimately happened, you would have seen Bill Dudley, Stan Fischer or Janet Yellen out talking. They're very aligned. They're very tuned to what the market expectations are. And they will guide the market if it's off base. So I don't think we're going to be in a surprising situation. I do think we'll have at least two, hopefully three rate increases next year. We need to get back to normal. This is how economies function. If you don't do that you create asset bubbles.
SJ: James, let's get back to the bank itself. Smith Barney actually said that acquisition is paying off wealthy, wealth management performing strongly. But you need to keep investing to keep up that momentum. So is more M&A focused than the wealth management side of the business the priority?
James Gorman: You know they were certainly open to it. But right now there's enormous embedded growth in that business. We've created something where we cover the fixed costs comfortably. So every incremental dollar of revenue comes on with a higher incremental pre-text margin than the existing pre-text margin. So it's a very levered to the upside business. At the same time we're building the bank we have over 150 billion dollars in deposits in our bank and wealth management that's the 11th largest bank in the United States. And we did it without going and building a bank.
SJ: Where does your AUM stand?
James Gorman: Assets under management are about 2.3 trillion. So that's depending how you count it. Number one or number two in the world. It's a phenomenal business. It's very stable. We're enjoying nice growth over last year. There's a lot of product moving to a neurotized product. We're very happy with it.
SJ: When do you think trading revenue will start turning around?
James Gorman: Boy that's a good question. It's not apparent right now. I mean and others have said this, the trading revenue particularly in fixed income is very consistent with what we saw in the summer. And everybody in the market sees that there's no volatility, there's very little volume. I think next year if we get a corporate tax plan done, rates start ticking up, QE continues on the path that they're on. I think we'll start to see more normal market volatility kick in. And with that will come more normal trading maybe. Right now subdued. But you have to decide as investors and frankly as executives, are you playing on a quarterly basis, or are you playing over the full course of the cycle. Trading revenues will come back on the fixed income side. But it's not there yet.
SJ: James, we're going to wrap up the conversation for now but we will be not letting you go, we're going to talk about the market conditions and the international markets and the global growth strategy when we return. James Gorman, the chairman of Morgan Stanley. More when we return after this break.
SJ: Welcome back let's get back to our exclusive interview with James P. Gorman, chairman and CEO of Morgan Stanley. James let's talk about the international landscape and what Morgan Stanley's post Brexit strategy is.
James Gorman: You know it's tough because we don't really know what post-Brexit looks like.
SJ: We're in uncharted territory aren't we?
James Gorman: Absolutely, I said it from the beginning, I felt, I'm not a British citizen so it wasn't fair of me to say but it was a mistake. Certainly from an economic point of view it will cost London jobs and we're all trying to minimize the impact of that. We will have to have a European headquarters, we're required to.
SJ: Is it Frankfurt?
James Gorman: It's certainly heading that direction but we're moving people between—there's a difference between the legal entity and then what we're putting in terms of other markets. So sales coverage people can work in Paris, can work in Milan. You know, we have 5,000 people in London.
SJ: Does it involve job losses?
James Gorman: I think it will involve job shifts. I think what will happen ultimately is the job will move to Europe, whether the people move… I mean folks have kids they're dealing with schools they're dealing with housing. It's not so easy just to say to somebody pick up and move to Frankfurt, move to Paris, move to Milan. In small numbers yes, but there's going to be a lot of banks pushing people into those markets. Listen, it's not a positive clearly from an expense capital liquidity perspective. But we're dealing with it and it will be less than 10 percent of our employee base would be affected.
SJ: James, how messy could the broader Brexit transition be when you consider the political crisis that is engulfing Theresa May's administration right now?
James Gorman: You know we've got political sort of organ rejection of politicians around the world. When you think about you know the recent election in New Zealand, the youngest prime minister in history. Trudeau in Canada, Macron in France, what happened with Trump and certainly in the UK now with Theresa May. I can't really predict because we don't know what Brexit will really look like, we don't know what the British government will look like two or three years from now so we're in uncharted territory. Our approach is conservative we're doing as little as we can do to be as least disruptive as we can be for our employees and for our clients. At the same time will be regulatory compliant when we have to be.
SJ: And the politics especially in continental Europe seems to ebb and flow but right now when you consider developments in Spain and Catalonia and when you consider that we have national elections in Italy next year, can we say political risk is back for markets?
James Gorman: You know I talked about this at a lunch we had yesterday and in the aggregate I would say geopolitical risk is relatively subdued compared to other decades we've been in notwithstanding North Korea notwithstanding what's going on in the Middle East. Political risk is at extreme high level. We've had organ rejection of our politicians all over the world. Economic risk however, the economies have been doing extraordinarily well. We have synchronized economic growth from China to Japan to Germany to the U.S. and even Russia has turned, Brazil has turned, Mexico is doing great, India is doing great, Southeast Asia is doing great. So the tension points are around political risk. It hasn't yet manifested itself in core policy or legislative change. It's more people change. So the jury's out.
SJ: Let's get back to the nuts and bolts of the markets in Europe and the banking sector. How would you characterize your counterparts in Europe?
James Gorman: Well I you know it's hard to comment on competitors. We started from different places. I think the TARP program was a stroke of genius. It caused the U.S. banks to recapitalize after the crisis aggressively, which we all did. And in our case we took a major shareholder MUFG, largest bank in Japan and phenomenal institution. So the U.S. banks moved very aggressively because TARP was weighing on top of them. They wanted to repay taxpayers, which we did with the protein at 20 percent return, which they deserved frankly for supporting the banking system. In Europe it was very different. So the European banks are now struggling with… in most cases they've filled their capital holes, not in all but in most cases…
SJ: I was about to ask you that, do you think their capital buffers are sufficient?
James Gorman: Well, I can't read individual institutions. Broadly, yes. I think Europe is definitely out of the woods in that regard. And I think the management I know all of the bank management and the major institution they are working really hard to get to a point where they can position for growth. But many of them still have business model issues and they have to decide. We decided on our business model, which was we wanted a world class investment bank attached to a world class wealth and investment manager to give us stability. That was the path we consciously went down 10 years ago.
SJ: Let's circle to China now and as a house you are bullish on China. I just want to challenge you on that. Why are you when debt to GDP is, according to some metrics, 300 percent? Isn't that a credit event waiting to happen?
James Gorman: China also has probably the highest savings rate in the world you know. So I think you've got to look at the total context. China's economy is growing I guess reported at 6.9 percent, call it six percent. It's a 10, 11 trillion dollar economy. I mean this is a gift that keeps giving to world economic growth. The U.S. economy is a 17 trillion dollar economy and it's growing at three percent. That's extraordinary. China is growing at six percent.
SJ: But the leverage doesn't concern you? And is Beijing doing enough to control that?
James Gorman: I mean give Xi Jinping credit. He's consolidated extraordinary powers, he's put in place the economic plan, they're driving up domestic demand. China is becoming you know a market for importers as it was exporter and the growing consumer class putting some of those savings to work matters. They've cleaned up through the anti-disciplinary committee a lot of the corruption. They are making the state owned enterprises much more global and competitive. You know Sri this is no easy task right. This is a massively complex economy with 1.4 billion people. But I give them very high grades for the progress made and they're opening up China.
SJ: You mentioned the party congress there, do you think that we have more policy certainly now? And does that mean that we can see more deal flow, more IPOs, more M&A's?
James Gorman: It looks like it. There's more confidence. You know I think leading up these Congresses come every five years. The last 18 months are always a period of great uncertainty. Who's going to be on the Standing Committee? How big will the standing committee be? Who will be the new Politburo members? What policy changes will the government put in place? And I think the government is looking for sensible growth to take into account environmental issues which are critical, to take into account the desire to build a domestic consumer driven economy which is critical, and part of that is opening up the markets. Just recently a surprise, the banking sector was told we could go to 51 percent. You know there will be an implementation period and we own a business say washing securities. We just took it from 33 to 49 percent. We want to control our destiny in China. That's a sign of China opening up and behaving and acting like the other major economic countries around the world.
SJ: I want to play a piece of tape from one of your colleagues and competitors if I might say so John Cryan at Deutsche Bank talking about automation and the risks for the banking industry. Here it is. So that was John Cryan there from Deutsche talking about the risks in the future to the banking model raised by automation. I just want to know James what's Morgan Stanley doing to future proof the business in this the era of disruption?
James Gorman: Well you know I mean in terms of industries that are going through a massive transformation from automation I wouldn't put banking at the top of the list. Obviously the Amazonian effect for the retailing industry, driverless cars, factory plants, there are many sectors where automation artificial intelligence will lead themselves more obviously. A lot of what we do in finance is very sophisticated, requires human intellect and judgment. So I'm not at a point where I think the whole thing is being transformed. Maybe the retail branch system is different but we're on the essentially the institutional and high net worth wealth management business. That said you know looking at not just automation but digital, cyber, cryptocurrencies, all of the evolutions that are taking place in our sector, and coming at us not in onesies and twosies but these are five or six major forces at work in the sector.
SJ: Can I just press you on Bitcoin because you've described it as more than just a fad. Tell us more about that.
James Gorman: Well you know it's obviously something which now everybody loves to have an opinion on and Bitcoin I'd say is punching above its weight OK. It doesn't quite deserve the attention it's getting.
SJ: It's not a speculative bubble?
James Gorman: If something goes up 700 percent in a year it's by definition speculative. So anybody who thinks that buying something that it's a stable investment is deluding themselves. It might go up another 700 percent but it could easily not. So Bitcoin is by definition speculative. The question is as acceptance is growing with Bitcoin and user ability is growing clearly it's not going away. That's what I meant by a fad. Is it a needed new form of stored value? I'm not so sure. Will the regulators and the central banks just watch this from a distance? I'm not so sure. Does it support people who want to use currencies on an anonymous basis for wrong purposes? Absolutely, so there are issues around this but it's not a fad it's not going away overnight.
SJ: James it's been a pleasure talking to you sir, thanks very much for your time today.
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